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Default Externalities in Emerging Market Systemic Private Debt Crises

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  • Gondo, Rocío

    (Banco Central de Reserva del Perú)

Abstract

This paper analyzes how default externalities lead to an excessive incidence of systemic private debt crises. An individual defaulting borrower does not internalize that her default leads to a depreciation in the exchange rate because international lenders will sell any seizable assets and flee the country. The exchange rate depreciation in turn reduces the value of non-tradable collateral and induces other borrowers to default, leading to a chain reaction of defaults. The inefficiency in default spillovers can be corrected by strengthening the enforcement of creditor rights, so that individual agents default less often, reducing the frequency of systemic default.

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File URL: http://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2013/documento-de-trabajo-23-2013.pdf
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Bibliographic Info

Paper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2013-023.

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Date of creation: Dec 2013
Date of revision:
Handle: RePEc:rbp:wpaper:2013-023

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Related research

Keywords: Financial crisis; default; capital ows; pecuniary externalities; creditor rights; real exchange rate;

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  1. Carmen M. Reinhart, 2010. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises," NBER Working Papers 15815, National Bureau of Economic Research, Inc.
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  14. Martín Uribe, 2006. "Individual Versus Aggregate Collateral Constraints and the Overborrowing Syndrome," NBER Working Papers 12260, National Bureau of Economic Research, Inc.
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